China’s LNG imports are set to fall more than 14% year-on-year to 69 million tonnes (mt) in 2022, the largest decline since it began LNG imports, says Wood Mackenzie.
After solid growth in 2021, China’s gas and LNG demand is expected to slow in 2022. China’s gas demand (sum of production and net imports) in second-quarter 2022 decreased 5% year-on-year. The weakening gas demand was due to a confluence of factors including economic slowdown, rising gas import prices, policy support for clean coal, and a warmer-than-usual winter.
“Gas-fired power was a major contributor to the absolute decline in volumes. In addition to the factors mentioned earlier, the sector was pressured by growth in use of renewables,” said Miaoru Huang,
Wood Mackenzie research director.
On the supply side, domestic production increased by 4.9% year-on-year in first-half 2022, while pipeline imports increased 11%. LNG imports totalled 31 mt, down 21% year-on-year.
Huang said: “Chinese buyers have minimized their exposure to costly spot LNG. Spot purchases were muted, and reportedly, some Chinese players resold cargoes into the European market.”
While China remains committed to long-term climate goals, the immediate focus is to guarantee energy supply and stabilize energy costs. The country’s 14th 5-year energy plan, unveiled in March, reemphasised coal as the backstop of energy security.
In first-half 2022, the landed prices of LNG imports averaged $15/MMbtu, almost double the average landed prices of the same period in 2021. Prices of pipeline gas imports increased by 40%, reflecting a longer time lag in indexation to oil prices and a larger share of low-priced Russian pipeline gas.
Based on Wood Mackenzie’s latest commodity prices outlook, China’s gas import prices will remain elevated for the rest of the year. Spot LNG delivered to eastern coastal provinces would average $43/MMbtu in second-half 2022, way above city-gate benchmarks of $8/MMbtu. Oil-linked pipeline gas and LNG contracts, as well as Henry Hub-linked LNG contracts, will see prices increase from first-half 2022 levels. They remain more economical than spot LNG though, with average delivered prices of $13-20/MMbtu.
Policy remains committed to stabilizing gas prices for ‘prioritized’ sectors relating to people’s livelihoods, such as residential and space heating. Non-prioritized sectors are experiencing unprecedented gas price hikes. Reportedly, in summer 2022 and winter 2022-23 gas pricing plans, wholesale prices for regulated gas into non-prioritized sectors are 15-20% higher than city-gate benchmarks, and for non-regulated gas, prices are 40-80% higher. Such price schemes, plus a relaxation on coal use, will limit downstream buyers’ appetites.
Huang said: “Power generation, feedstock use for fertilizer and chemicals, transport, and commercial gas demand are expected to decrease from 2021 levels. We still expect industrial fuel-gas demand to grow above 2022 levels, but the increments have been downgraded. Residential and space heating will be much less impacted as gas supply to them is prioritized, and prices are protected.”
“China is unlikely to change its coal policy as the backstop of energy security in the near future. National policy is unlikely to encourage gas demand in a significant manner due to concerns over supply chain pressure and affordability.”
“As such, we forecast China’s LNG imports to fall 14% year-on-year to 69 mt this year. This will be the largest decline since China began importing LNG in 2006. In 2015 China’s LNG imports declined for the first time but by 1% only. Japan will move back to becoming the world’s largest LNG importer this year.”
Nevertheless, according to Huang, local governments are playing a bigger role in driving gasification programmes. Some key gas-consuming provinces, such as Guangdong, Zhejiang, and Shandong, have already set gas demand growth targets in their respective regional 5-year plans, either in absolute terms or as a share in the energy mix over 2021-25. Not all those targets can be met in the face of economic headwinds and high gas costs. However, those plans reveal the potential in China’s gas demand growth that could materialize given affordable gas price levels and supply chain support, according to Wood Mackenzie.